Why does cobweb process exist in some markets?

Question

Why does cobweb process exist in some markets?

Answer 1

The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producers' expectations about prices are assumed to be based on observations of previous prices. The cobweb model was developed by the Hungarian economist Nicholas Kaldor. The cobweb model is based on a time lag between supply and demand decisions. Agricultural markets are thought to be a situation where the cobweb model might apply, since there is a lag between planting and harvesting. Suppose for example that as a result of unexpectedly bad weather, farmers go to market with an unusually small crop of strawberries. This shortage, equivalent to a leftward shift in the market's supply curve, results in high prices. If farmers expect these high price conditions to continue, then in the following year, they will raise their production of strawberries relative to other crops. Therefore when they go to market the supply will be high, resulting in low prices. If they then expect low prices to continue, they will decrease their production of strawberries for the next year, resulting in high prices again. for diagramatic illustration visit:

http://www.econmodel.com/classic/cobweb....

http://en.wikipedia.org/wiki/Cobweb_mode...